How Facebook Might Win

Portals are out, social networking sites are in.

OK, so most of you don't agree that social networker Facebook is worth $15 billion. So be it. I may, indeed, be wrong.

But I'm encouraged by the results of a new study from Microsoft (Nasdaq: MSFT) subsidiary Avenue A | Razorfish, which concludes that advertising dollars are moving away from portals such as MSN and Yahoo! (Nasdaq: YHOO) toward vertical sites, including social networks Facebook and News Corp.'s (NYSE: NWS) MySpace.

Digital ad dollars spent through Avenue A | Razorfish reached $735 million in 2007, up 36% from the prior year. Vertical sites accounted for 39% of that total, up from 37% in 2006. A "vertical site" attracts readers purely for its original content -- such as Fool.com. Portals and search engines, by contrast, aggregate information.

But it was the entertainment and community sites -- like Facebook and YouTube, respectively -- that saw the greatest growth among verticals. Each subset improved by more than 50%, to $51.5 million and $55 million, respectively.

Search engines also blossomed, with the likes of Google (Nasdaq: GOOG) and IAC's (Nasdaq: IACI) Ask.com improving their share of ad dollars from 28% to 31%.

Notice anything in the math? Verticals and search engines improved their share by 5% altogether. Portals dropped by the same amount; down from 24% in 2006 to 19% last year.

To me, this all but confirms that a Microsoft deal for Yahoo! would be, at best, ill-advised. Yahoo!'s properties are no longer the go-to spots to reach the digitally hip.

Facebook and MySpace are where it's at now. And while we've no proof that Facebook can produce the sort of revenue a $15 billion valuation would demand, it's become clear that advertisers covet the network it has built. Same with MySpace, LinkedIn, and each of their social-networking peers.

In short: You're yesterday's Internet, Yahoo!. It's Facebook that is the face of the digital future.

Author

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.